Piketty's idea of a wealth tax is no joke: Bloomberg opinion

As Warren Buffett could tell you, investments can soar in value for decades without gains ever being realized or tax ever coming due.

View full sizeBerkshire Hathaway Chairman and CEO Warren Buffett has noted that private investments can soar in value for decades without gains ever being realized or tax ever coming due.AP Photo

By Clive Crook

From the left, James Galbraith of the University of Texas at Austin says the idea is futile: "Why spend an entire chapter on it - unless perhaps to incite the naive?" Daniel Shuchman in the Wall Street Journal
says it ignores the sources of prosperity: "He breezily assures us that
none of this would reduce economic growth, productivity,
entrepreneurship or innovation." Tim Worstall
at Forbes says it's a logical impossibility. "Mr Piketty's focus on
soaking the rich smacks of socialist ideology, not scholarship," says
the Economist.

Piketty himself acknowledges that the tax is Utopian and - as
in the rest of book - he spends no time interrogating his big
conclusions or trying to improve them. But if you unpack the idea a
little, it starts to look better. When it comes to feasibility, you
might even claim that policy is moving this way.

On equity and efficiency grounds, it makes sense to tax wealth.
The practicalities, though, are daunting. Flight to low-tax
jurisdictions - the rationale for making a wealth tax global - is only
one of many difficulties. To levy a tax each year, you'd need an annual
accounting of wealth, which isn't easy to do, and you'd have to contend
with the fact that wealth doesn't always produce a flow of income that
can be used to pay what's owed.

The best way to tax wealth is therefore to tax capital income
as it's realized and, once a lifetime, tax inheritance. Tax authorities
generally pay lip-service to this concept, but they execute it badly.

In America, capital gains are taxed when realized, though at a preferential rate. More important, as Warren Buffett
could tell you, investments can soar in value for decades without gains
ever being realized or tax ever coming due. Incredibly, when those
assets are passed to heirs, their value is re-based - and the unrealized
gains simply disappear for capital-gains-tax purposes. True, the estate
is then supposedly taxed in its own right, but the wealthy can find
ways around that too. The result is that enormous accumulations of
income - that is, wealth - can escape tax altogether.

What's needed is moderate but effective taxation of capital
income combined with moderate but effective taxation of inheritance, so
that unrealized gains are brought back into the tax base, either during
the course of an investor's life or at death. In the case of the very
rich, attuned as they are to tax-avoidance opportunities, effectiveness
does require international co-operation. But here's the thing: That part
is already happening.

Bear in mind that the U.S. taxes its citizens wherever they
live and work in the world. In that sense, the U.S. already collects a
global income tax. In addition, in recent years, the U.S. authorities
have been waging war on foreign tax shelters and bank-secrecy laws. In
some ways, this campaign has gone too far: The rules have become
burdensome for ordinary taxpayers who have ever lived or worked abroad.
(Many Americans complain that foreign banks and financial companies no
longer want them as clients - too much record-keeping and reporting.)
What's interesting, though, is just how far foreign jurisdictions have
gone in accommodating U.S. demands for compliance with U.S. standards.

Plutocrats are mobile and can live and work where they please.
They can hire teams of lawyers to advise them on domicile, residence,
citizenship and any of a thousand factors that will affect their tax
liabilities. Co-operation among tax authorities in closing loopholes is
therefore necessary. But it's happening, and is likely to go further.

Piketty's nightmare of rule by oligarchs rests partly on his
assumption that international tax competition will drive capital taxes
to zero. In fact, greater co-operation among governments is already
helping to ensure that the very rich pay their taxes. Combine this with
reform at the national level to recapture unrealized capital gains for
tax purposes and you could tax global wealth without ever needing a
"global wealth tax."

Not quite as momentous as Piketty's overblown "central
contradiction of capitalism" - but on taxing wealth, he has a point.

(c) 2014, Bloomberg News

Clive Crook is a Bloomberg View columnist and a member of the Bloomberg View editorial board.